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Are Angels Stepping in Where VCs Fear to Tread?

Anita Campbell

CEO, Small Business Trends LLC

Hi there, you can call me Anita. I'm CEO at Small Business Trends LLC and I'm based in Cleveland/Akron, Ohio Area.

Is your small business seeking capital to expand? If so, there’s good news and bad news in two recent reports about the state of business financing.

First, the bad news: If you’re looking for venture capital, it’s getting harder to obtain, according to the latest MoneyTree survey from PricewaterhouseCoopers and the National Venture Capital Association. During the third quarter of 2012, VC investments declined both in overall dollars and in deal volume. The dollars invested dwindled by 11 percent, and the number of deals declined by 5 percent.

The decline in VC dollars and deals both quarter-over-quarter and year-over-year is happening for several reasons: First, fewer new venture funds are being raised, resulting in less capital available for new investments. Second, venture capitalists are being extremely cautious with their available capital and focusing on companies already in their portfolios, rather than seeking new investments.

Numbers Show Growth

Total dollars, number of investments and number of investors all grew compared to the first half of 2011.Total dollars invested increased by 3.1 percent, total investments by 3.7 percent and the number of active investors by 5 percent. According to the study, these figures solidify the steady recovery that the angel market has been undergoing since 2008.

There’s especially good news for existing business owners: Expansion-stage capital accounted for 22 percent of angel investments in the first half of 2012, an increase of 13 percent from the same period last year.

Some Industries More Blessed Than Others

Of course, your industry is a key factor in your ability to find angel or VC capital. What industries are most likely to succeed? No surprise that software dominates VC investments, accounting for $2.1 billion in Q3 2012. Software was also near the top of the list for angel investors, accounting for 14 percent of all angel deals.

Also popular are healthcare services and medical devices/equipment, which accounted for 24 percent of angel investments and were a growth area for VC investment, and biotech, which was the second-most popular type of VC investment and the third-most popular angel investment.

Rounding out the most popular sectors for angel investors were retail, IT services and media. For venture capitalists, financial services, business products and services and retailing were also growth areas. What’s not hot? Investments in clean tech are on the decline.

Whose Money Is Right For You?

Of course, just because one type of financing is growing and the other dwindling doesn’t mean you should choose one over the other. You need to choose the option that works best for your needs. For example, with the average deal size at $336,390, angel capital is often a better match for the average small-business owner than VC financing, which involves much larger sums. Or perhaps you could use angel capital to get you to the next level, where you’re able to attract a VC’s attention.

Location plays a role, too. If you’re looking for VC, keep this in mind: More than half (58 percent) of VC funding went to businesses in California, Massachusetts and New York. Not in one of those hotbeds? Perhaps local angels will be more your speed.